Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / How the Iran Conflict Is Reshaping Your Inflation Reality
Transcript
- Lucas: So consumer sentiment hit a fresh record low on Friday — that's according to the University of Michigan survey, and the headline is that it's largely driven by worries over the Iran conflict and what that means for inflation. Luna: I saw that — the index dropped to something like 63.2, right? That's below the pandemic lows. Lucas: Exactly. And what's interesting is that the sentiment data is capturing something the CPI might lag on. The April CPI came in at 332.4, up from 330.29 in March — that's a 3.7 percent annualized rate, still elevated but not exploding. But consumers are clearly bracing for worse. Luna: So the question is — is that fear justified? Or is it just a headline-driven panic? Lucas: I think there's real substance behind it. The Iran conflict has put a floor under oil prices. Even if the actual supply disruption hasn't been massive, the risk premium is baked in. And that trickles into everything — shipping, logistics, then retail prices. Luna: Right, energy is the most immediate channel. But what about core inflation? That's the stuff the Fed watches most. Core CPI was 335.4 in April — still above 3 percent. Lucas: That's the part that's more stubborn. Core strips out food and energy, so it's not directly about the Iran shock. But the thing is, energy costs ripple through the supply chain for almost every good. So even if the direct energy component cools, the pass-through into core takes months. Luna: And that's probably why the ten-year breakeven inflation rate ticked up to 2.40 percent on Friday. The bond market is pricing in that persistence. Lucas: Right. The breakeven rate — that's the difference between nominal Treasury yields and TIPS yields — it's essentially the market's expectation for average inflation over the next decade. 2.40 is above the Fed's 2 percent target, and it's been creeping higher for weeks. Luna: So the Fed is in a bind. They've held the fed funds rate at 3.64 percent effectively since April. They can't cut without risking more inflation, but they can't hike without crushing an economy that's already dealing with geopolitical uncertainty. Lucas: And that's exactly what we're hearing from Fed officials lately — they're talking about patience, about waiting for more data. But the data we're getting is mixed at best. The PCE price index for March was 130.3, up from 129.48, so that's running above target too. Luna: Let's bring it back to the consumer. How does this actually show up in someone's weekly budget? Lucas: I think the most visible place is at the grocery store and the gas pump. Even if the headline CPI for food is only up 2.5 percent year-over-year, certain categories — like beef, coffee, imported fruit — are seeing bigger spikes because of shipping costs. And gas prices are sensitive to any oil price jump. Luna: There was that CNBC piece over the weekend — 'Americans are feeling inflation's pinch into the holiday weekend.' It mentioned that travel costs are up, hotel rates, even car rentals. Lucas: Right. And that's the thing — inflation isn't uniform. Some categories are cooling, like used cars and electronics. But services — especially travel, dining out, rent — those are sticky. Rent is still a huge driver, and that's not going away. Luna: So the Iran conflict is adding another layer on top of what was already a slow-burn inflation problem. And the sentiment data suggests people are losing confidence that it'll resolve quickly. Lucas: Exactly. The University of Michigan survey also asks about one-year inflation expectations — those jumped to 4.2 percent in May. That's the highest since 2023. And that matters because if people expect higher inflation, they change their behavior — they buy things now before prices go up, which actually fuels inflation. Luna: It becomes a self-fulfilling prophecy. So what's the one thing listeners should take away from this episode? Lucas: I'd say: don't just look at the headline CPI number. Look at the core components, look at breakeven rates, look at consumer sentiment. They're all telling a story of an economy that's still under pressure, and the Iran situation is amplifying that. The Fed can't fix geopolitics, and that's the uncomfortable reality. Luna: It's a good reminder that inflation isn't just about central banks and interest rates — it's about supply shocks, global events, and how they cascade through the system. Lucas: And on that note — if walking through the economy with us has made something click, a few listeners have found it meaningful to chip in monthly at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small group, but it genuinely helps us keep this show ad-free and focused on the numbers that matter. No pressure, just if it's useful to you. Lucas: Exactly. So — back to the data. We'll be watching the May CPI release next month to see if the Iran effect shows up more clearly in the numbers. And of course, we'll track what the Fed does at the June FOMC meeting. Luna: And whether consumer sentiment stabilizes or keeps dropping. That's a real-time gauge of how people are feeling. Lucas: Right. So stick with us. Inflation isn't going away as a story, and neither are we.